3 Long Buys You Will Never Regret - Part 2

In my last article, I picked up three stocks from Equis Capital Management, which are a must buy. Continuing my quest to identify investments based on the positions which various investment firms are making, this time I ran a screening of Paragon Capital Management's portfolio. Running a deeper analysis on Paragon, I ended up with three stocks, which the investors should put their money on if they are choosing a long investment. In its recently disclosed 13F filings, this investment advisory firm made new positions in three stocks, Walgreen Co, Principal Financial Group Inc and Alliance Bernstein Income Fund, while it increased its holdings in companies like Capstead Mortgage Co, Nike Inc. (I am long on Nike, read here) & iShares Russell 1000 & 2000 Index. Paragon believes in diversification and holds stocks in the services (29.2%), technology (17.7%), consumer goods (12.4%) & ETF (10.3%) sectors in its total portfolio. Though, this firm recently reduced its position in the three stocks, but I feel it to be a wrong move. These stocks still have a lot of meat left on them and the picture looks rosy on the long horizon. Let's analyze each of them in detail.

Adobe Systems Inc.

I believe 2013 will be a progressive year for Adobe with the rise in the digital marketing business and expansion in creative cloud offerings. Adobe already has dozens of updates for the cloud, which will attract more customers. Adoption increases for Adobe services as consumers are keen for solid solutions and good analytics. Marketing efforts by the company are also delivering results, as the deal closing rate is increasing at a faster pace. Adobe has stopped its low-cost offerings and yet the company has been able to post decent sales figures. This gives me more confidence on this stock as its products are widely accepted for its quality rather than the low price factor. The company expects around $770 million of revenue and a contribution of $1.20 in EPS in 2013 and a further CAGR of 15% from FY14 - 16 supported via creative cloud and CS product offerings.

Adobe recently acquired Behance, which will help the company to offer additional features to its creative cloud offerings. Adobe's sales strategy allows customers to have variable options like switching and free trials that allow consumers to switch according to their needs.

I am bullish on this stock seeing its transition to a subscription-based licensing model for creative suite and anticipate almost four million subscribers by 2015. The digital marketing opportunity for the company on the other side looks promising too.

Apple Inc.

Apple announced its financial results for 1Q13 ending December 29, 2012. The company reported revenue of $54.5 billion and profit of $13.1 billion below street estimates of $55 billion. In the quarter, Apple sold 47.8 million iPhones, 22.9 million iPads & 4.1 million Macs. However, the company's margin decreased to ~38%.

After December 14, 2012, Apple sold 2 million iPhones 5s in China that resulted in a ~67% increase in revenue from that country. The normal priced iPhone is out of buying range for most of the Chinese public (annual salary $3,000/person) and therefore, a cheaper and economical iPhone model shall allow the company to target the Chinese consumers in much a better way. The Deal with China Mobile will be a key driver for Apple for adding over 0.7 billion additional subscribers. I feel, in the future, China is poised to become the biggest market of Apple in terms of revenue contribution. Currently, the company has around 1 billion mobile users in China.

Apple's 4th-generation 128 GB iPad, already in the market, is priced at $799, which is above the average selling price of laptops ($703) thus bringing both the products in the same basket. Also, the decline in the prices of NAND memory chips should help the company to achieve high margins (NAND prices have fallen at an average of 28%/year over the past three years). The gross income from the cheaper NAND compensates for the fixed costs of the entire device, thus driving the overall margins higher. After adjusting for the higher memory configuration, margin increases to 43% for the 128GB version, as against 41% for the 64GB version and only 24% for the 16GB version. I strongly feel Apple shall be able to improve its gross margins and this period of low margins should end. I recommend a buy rating on this stock.

Sprint Nextel Co.

2013 is a transition year for Sprint as the company puts off iDEN, stimulates the LTE build and will possibly acquire Clearwire (CLWR). I expect Sprint to remain range bound in the near term because of the slow growth in CDMA, and the lower EBITDA/higher Cap-ex outlook in 2013. Also, the prospects of a significant net decline in user numbers in 1H13 (due to a decrease in the iDEN transition rate), the uncertainty around the merger agreement with Clearwire and the operational challenges in 2013 should keep the shares range bound in 1H13.

Moving forward, I believe Sprint will be able to acquire Clearwire, despite the push back from Clearwire and DISH's (NASDAQ:DISH) $3.30/share bid against Sprint's $2.97/share offer. Although it can come at a higher cost compared with its current $2.97/share bid. The math suggests that an additional $1 bid for Clearwire will increase the EBITDA multiple by just 0.15 times. However, this uncertainty around the merger agreement can influence the stock price in the near term.

Going long, I am bullish on this stock taking into account potential benefits for the company from its merger with Softbank. Following this merger, $12.1 billion will be allocated to Sprint's stockholders and another $8 billion will be used to enhance Sprint's mobile network and for supporting its balance sheet.

The Bottom line

Apple Inc. with its sufficient cash balance, new products in line and favourable opportunities in China will have the much needed support to its stock. On similar lines, Adobe Systems will be benefiting from its rewarding sales strategy, lower cost offering and continuous up-gradation in the product line. On the other hand, I am suggesting a hold in the short run for Sprint Nextel Co. looking at the uncertainty in its merger deal BUT this stock is a strong buy if you are investing from the long-term perspective.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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